Indian 10-yr bond yield falls to 7-week lows

* Tapering supplies, ample cash support demand for debt

* 10-year yield may touch 7.0 percent soon - trader

By Boby Michael

MUMBAI, Nov 25 - Indian federal bond yields fell to seven-week lows on Wednesday, with sentiment underpinned by a tapering of fresh debt issues, ample cash in the market and falls in U.S. Treasury yields.

The yield on the 10-year benchmark bond <IN069019G=CC> closed at 7.19 percent, after falling to 7.17 percent during trade, its lowest since Oct. 8. It had ended at 7.21 percent on Tuesday.

Volumes were 180.45 billion rupees on the central bank's trading platform.

"It fell today tracking an overnight rise in U.S. debt prices, but the domestic scenario is also very much supporting, and we may see the 10-year yield touching 7.0-7.10 percent soon," said a trader at a state-run bank.

There is no government bond auction this week and there are 640 billion rupees of bonds scheduled to be sold before the end of the fiscal year in March, which traders say can be easily managed by the market.

The government has sold 3.54 trillion rupees of bonds since the beginning of the 2009/10 in April.

On Tuesday, a top adviser of the Prime Minister told Reuters that the government was not looking to curb foreign inflows and fiscal stimulus measures would not be withdrawn until the 2010/11 fiscal year at the earliest. [ID:nBOM105873]

"Liquidity is pushing the market now," said Roy Paul, treasury head at Federal Bank

"Repeated statements from the government are showing that the stimulus packages will not be withdrawn until there are clearer signs of growth."

The government sold 70 billion rupees of treasury bills on Wednesday, and traders said the cut-off yield reflected the better demand for debt.

Traders said investors had been pushing out expectations of a rate hike from January to the end of the fiscal year, and that had also supported sentiment.

In interest rate futures on the National Stock Exchange , the December contract <N10Z9> implied a yield of 7.9854 percent, above its previous close of 7.8459 percent.

The yield implied in the March contract <N10H0> was at 8.2530 percent, higher than its previous close of 8.2444 percent.

The benchmark five-year interest rate swap ended at 6.45/48 percent from previous close of 6.49/53 percent. [IN-SWAPS] ((boby.michael@thomsonreuters.com; Tel: +91-22-6636 7377; Reuters Messaging: boby.michael.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))